Corporate spreads still have a way to go

Corporate spreads have declined considerably since the “panic peaks” of late last year. For example, the current Baa spread in the US is 374 basis points compared with 611 basis points in December as shown in the chart below.

The chart also shows corporate spreads during other periods of intense economic, financial and geopolitical strains. Strikingly, corporate spreads widened to 724 basis points in 1932 during the Great Depression.

David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, said: “To be sure, corporate spreads have come in a long way from their near crisis highs, but looking at prior peaks around major events and economic downturns, it does appear as though there is still a lot of very bad news priced into the sector.”

Most indications are that the credit market tide has turned on the back of the massive reflation efforts orchestrated by central banks worldwide and that the credit system has started thawing. However, although the convalescence process seems to be well on track, it still has a way to go before confidence in the world’s financial system returns to more “normal” levels, liquidity starts to flow freely again, and the economic recovery can commence.